Valuation models and Rates of Return (ROR) on bonds, stocks

1) A bond which has a yield to maturity greater than its coupon interest rate will sell for a price
a. below par.
b. at par.
c. above par.
d. what is equal to the face value of the bond plus the value of all interest payments.

2) A 20-year bond pays 12% on a face value of $1,000. If similar bonds are currently yielding 9%, what is the market value of the bond? Use annual analysis.
a. over $1,000
b. under $1,000
c. over $1,200
d. not enough information given to tell

3) A 10-year bond pays 11% interest on a $1000 face value annually. If it currently sells for $1,195, what is the approximate yield to maturity?
a. 9.33%
b. 7.94%
c. 12.66%
d. 8.10%

Solution Preview

1 A bond which has a yield to maturity greater than its coupon interest rate will sell for a price
a. below par.
b. at par.
c. above par.
d. what is equal to the face value of the bond plus the value of all interest payments.

Answer: a. below par.

If YTM is greater than the coupon rate, the bond sells below par.
If YTM is smaller than the coupon rate, the bond sells above par.
If YTM is the same as the coupon rate, the bond sells at par.

2 A 20-year bond pays 12% on a face value of $1,000. If similar bonds are currently yielding 9%, what is the market value of the bond? Use annual analysis.
a. over $1,000
b. under $1,000
c. over $1,200
d. not enough information given to tell

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